The experiment looked doomed at the start. Five years ago, General Motors, Ford Motor, and Chrysler, with the blessing of the United Automobile Workers union, created an independent entity to provide health insurance for more than 700,000 retirees and to manage the investments that would finance the benefits. The move was good for the automakers, allowing them to shed crushing liabilities that threatened to impede their recovery amid the Great Recession. The conventional wisdom was that the trust fund would quickly run low on money and ask union retirees to cough up large annual premiums or settle for more limited coverage. “People didn’t believe the math worked,” recalls Art Schwartz, GM’s labor negotiator at the time.
Contrary to expectations, the $61 billion UAW Retiree Medical Benefits Trust is thriving. Retirees’ drug costs are falling; dental, vision, and other benefits have even been added. What’s more, the investment fund that pays for all of it has booked double-digit annual returns in recent years. “A lot of people thought this wouldn’t hunt,” says Fran Parker, who came out of retirement in 2010 to run the trust. Parker, who previously headed a large health plan in Michigan, said in a July 10 interview that she relished the challenge. “I thought, Oh dear, I’m going to take care of the same people that I took care of when they were active. What a fitting bookend.”
Under Parker, the UAW trust, which is the largest private purchaser of medical care in the U.S., is forging paths in benefits management and emerging as a corporate-governance advocate. “The fund has accomplished some really impressive things,” says Harley Shaiken, a labor professor at the University of California at Berkeley, adding that there are lessons for other plans in how the trust’s managers have reduced costs by remixing coverage and pushing preventive services.
Skeptics had predicted health-care inflation would continue to run at 3 percent to 5 percent a year, outpacing returns on investments. Fortunately for the trust’s managers, that inflation rate has been relatively low, a little less than 3 percent last year.
Parker, a self-professed “big-data geek,” has beefed up coverage for preventive care and used analytics to pinpoint areas where costs could be better managed. In the past, routine doctors’ appointments weren’t covered, so retirees flooded urgent-care centers and emergency rooms when they fell ill. After administrators discovered that 400 retirees a month are newly diagnosed with diabetes, the plan began paying for programs that teach them how to contain the disease by changing habits. Coverage has also been added for cardiac rehabilitation for heart attack patients, for blood pressure screenings, and for programs to encourage people to buy lower-cost generic drugs. Annual pharmacy savings of about $500 million helped pay for dental and vision coverage.
The trust has $61 billion in assets under the direction of interim Chief Investment Officer Avtar Vasu, who used to be part of the team managing Harvard’s endowment. Investment performance has exceeded expectations, with gains of 14 percent in 2013, the most recent data available. That’s almost triple that year’s returns for pension funds at Ford and GM.
Meredith Miller, the trust’s corporate-governance chief, previously worked in the Connecticut treasurer’s office, where she helped thwart a plan by toolmaker Stanley Works (now Stanley Black & Decker) to quit the state and incorporate in Bermuda. In her current role, Miller leads a group of institutional investors that’s urging Wal-Mart Stores and others to be more forthcoming about when and how they force executives to return bonuses earned for actions later determined to be illegal or unethical. A trust proposal to make it easier for stock owners to appoint directors was endorsed by McDonald’s shareholders in May.
Miller also helms the Human Capital Management Coalition, a group of 24 funds with more than $2.3 trillion in combined assets that focuses on how companies develop policies on safety, diversity, and fair labor practices. Since 2010 the UAW trust has been on a letter-writing campaign to press companies in which it has stakes to add women to their boards, Miller says, because of growing evidence that diversity at the top improves the bottom line. Four of the 34 companies it’s reached out to so far, including CF Industries Holdings and Visteon, have added female directors.
Overall, the UAW’s experiment with the fund has been so successful that union President Dennis Williams is suggesting a similar arrangement for about 195,000 active autoworkers at GM, Ford, and Fiat Chrysler Automobiles as part of negotiations for a labor contract now under way.
One doubter who’s been happily proven wrong is Jim Kaster, who retired in 2007 from GM’s assembly plant in Lordstown, Ohio. “We were scared to death when they were going bankrupt. We thought it was really going to be tough for us and our families, because we’d seen what happened at other companies,” recalls the 68-year-old. “I’d say now we’re tickled to death about how it’s turned out. They’re doing a good job.”
The bottom line: The UAW’s $61 billion health trust for retirees has logged double-digit returns in recent years.